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Is a Discretionary Bonus Really Discretionary?

Many employers rely on the discretionary nature of their bonus plans to deny bonuses to employees they’ve dismissed. However, in an October 2017 decision in Singer v. Nordstrong Equipment Ltd., [2017] O.J. No. 5191, 2017 ONSC 5906, the Court held that stipulating that a bonus is discretionary in the policy doesn’t necessarily give the employer complete freedom to withhold the bonus. Rather, discretionary bonuses must be awarded through a “fair, identifiable process.”

The Court also reminded employers that policy amending documents are not always enforceable. In addition, the Court confirmed that a bonus entitlement claim can be decided on a summary judgment motion.

Key Takeaways

The Court held that, despite being discretionary, the decision to deny or grant a bonus upon employment termination should be made in a fair and reasonable manner. Accordingly, employers should ensure appropriate procedures are in place, and followed, for (i) reaching decisions to deny or grant a discretionary bonus, and (ii) documenting performance or other issues that may influence bonus eligibility.

Employers should be aware that fresh consideration is typically needed for substantive changes to the policy made over time. With that in mind, employers should take the following “housekeeping” steps aimed at preserving the enforceability of their policy:

1. Identify the company’s current bonus policy.

2. Consider whether the current policy is in fact valid and obtain legal advice where there is any uncertainty as to validity. E.g., Does the current policy effectively replace any previous policies? Was valid consideration given for prior amendments?

3. Review the current policy to ensure it’s clearly drafted and unambiguous. E.g., Does it clearly state whether bonuses are discretionary or non-discretionary, how bonuses are calculated, or that performance issues will be taken into account?

Employers with unwritten bonus policies should turn their minds to putting these to writing to reduce uncertainty. Last but not least, employers should anticipate that employees will increasingly bring summary judgment motions to resolve bonus entitlement issues that are not agreed to at termination.

Background

Mr. Singer was dismissed from a senior management position with the defendant employer in 2016 after 11 years of service. He moved for summary judgment seeking damages for wrongful dismissal including his bonus payment entitlement. The employer argued that the bonus entitlement issue required a trial but reasonable notice could be determined on the motion. The Court disagreed and held that the summary judgment motion was an appropriate avenue to determine the bonus entitlement issue and reasonable notice.

Mr. Singer argued that he was entitled to a bonus of 5% of the company’s pre-tax profit as evidenced by his prior bonus payments since 2010. Mr. Singer also relied on a Corporate Policy document that stated that the bonus pool was 15% of the company’s pre-tax profit and was non-discretionary. The employer argued that Mr. Singer was merely eligible, not entitled, to a bonus payment. In support of its position, the employer relied on a more recent version of the Corporate Policy document and a company-wide email that sought to amend the policy by stating that bonuses were at the sole discretion of the employer. The Court found the following:

the change to the Corporate Policy did not amount to an amendment because no consideration was given for the change;

calculating the bonus pool based on profit was non-discretionary but the way in which bonuses are allocated to individuals was at the prerogative of the employer; and

discretionary bonuses must be awarded through a “fair, identifiable process.”

The Court emphasized that, despite being discretionary, the decision to deny or grant a bonus upon termination of employment should be done in a fair and reasonable manner. Given that Mr. Singer’s termination letter did not reference his bonus eligibility for that year and there were no documented performance issues, the Court held that he was entitled to a bonus payment equal to the average amount he previously received in years with similar profit.

The Court also clarified that discretionary bonuses that are tied to performance are likely not payable through the notice period when a terminated employee is no longer providing service (though this will depend on the length of the notice period and how it correlates to the fiscal year). However, bonuses may be payable, at least in part, for the year in which the employee is terminated. The Court held that Mr. Singer was not entitled to a bonus payment for 2017 or 2018, during the reasonable notice period given that the bonus was tied to work performance.

Compare jurisdictions:Employment: International

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